Over the past couple of years, I’ve watched (and listened to) parents who have, with the best of intentions, given their children part or all of the down payment necessary to purchase a single family residence.
With very few exceptions, it has not turned out well. In some cases, after acquiring the home, the children experience difficult economic circumstances such as job loss, medical emergencies, or simply not being prepared for all of the extra expenses (maintenance, property taxes, insurance, etc.) that come with owning a residence.
Because they have not, usually as a married couple, jointly decided to work, save, and sacrifice in order to accumulate the money needed for a down payment, they find it less difficult to walk away from the responsibilities of a monthly mortgage. The parents often times are left holding the bag, financially speaking, and dealing with a large amount of resentment.
Parents need to know this: their child may think they want something and even know they want something. But until they are willing to work for something there’s no assurance that, first, they really want it, and second, that they’ll work to protect and preserve it once they get it.
The dream of home ownership that so many of us are sold is very different than the mortgage payment that comes tapping at your checking account every month. It doesn’t care if you’ve had car repairs, a leaky toilet that ruined the hardwood floors, or a sick child. Payment is required.
That’s challenging enough for couples who have mutually decided they want a home and have planned and saved for the down payment and have made the commitment to ownership. If the bulk of your equity is in the form of a down payment that you did not work and sweat for, it’s just too easy to walk away when times get tough. I’ve seen it happen, time and time again.
If you’re a parent and there’s a hundred thousand or more just burning a hole in your pocket, don’t give your child the down payment for a single family home. If they’re married or engaged to be married, set up a trust fund for your future grandchildren. Have it provide for their education. By that I don’t just mean college. I mean quality private schools from first grade through high school, if necessary. And college. And post graduate work. And the opportunity to study abroad. Better make that a cool half mil.
This may sound harsh, but skip your children. They’re adults now. They need to make their own way. (Unless they’re a writer, then, you know, God help you.) Invest in your grandchildren. Give them the huge advantage of a quality education.
It will make you feel good. You’ve contributed to the family’s well-being. It may free your children from worry and financial stress: they don’t have to plan for the expense of college for their children. They can start a business or continue their own education or pay off their own student loans. They can save more. They can pursue what they really love, even if it pays less.
It will definitely give you the chance, while you’re still with us, old sport, to impact your family’s future twenty, thirty or forty years down the road. The thinking and hope is this: whatever life throws at your children, your grandchildren will, in all likelihood, be alright. They’ll still have the opportunities that education affords. This kind of thinking and planning is common among Old Money families and those who aspire to join the club.
If there are no grandchildren on the horizon and your child wants a home, then go in as partners on an income property. You contribute the down payment. Let them live in one unit of a two or four-unit apartment building. Let them manage the day-to-day operations of the place and pay whatever part of the mortgage the rental income doesn’t cover. Let them pay the insurance and property taxes. Let them be the repairman and the landlord (or lady).
Let them get a taste of property ownership. If they can handle it, great. They can reside there and take care of it for as long as they like. If they don’t like it, or can’t make the mortgage payments, they can pay you rent, or move out into another place.
And if they think, after this experience of property ownership, that they want to own their own home, they can save their money, find their new place, and put the down payment on it themselves. (Whatever happens, you still have an asset that will hold its value and produce a predictable cash flow every month, as well as provide some tax benefits.)
I can assure you: your children will be much less likely to simply walk away when times get tough. They’ll be much prouder of their accomplishment, more than they would be grateful to you for giving them the down payment. And they’ll be much better stewards, when the time comes, to handle whatever inheritance you leave them.
Let them earn it.